Dec 17, 2025
FMA signals LRM a focus in 2025-6 year
In June 2025 the Financial Markets Authority (FMA) published its inaugural Financial Conduct Report (FCR). This new document is intended to spell out the regulator’s priorities over its coming financial year, which commences on 1 July, in this case for the current 2025/26 financial year. The FCR makes plain that liquidity risk management (LRM) for managed funds is a key focus of the FMA across the current financial year. Under the heading Ensuring that consumers’ and investors’ interests are at the forefront of decision-making, the FCR states the following:
2025/26 focus
[Managed investment scheme (MIS)] managers should have effective liquidity risk management (LRM) practices in place. We will engage with Supervisors to understand the findings of their LRM monitoring activities and where further clarity or insights from the FMA could support improvements…
Why this is our focus
• In the past, we observed that some MIS managers were overly optimistic about their LRM capabilities, and even the relatively strong performers had gaps in particular areas, including frequency of stress testing, use of available liquidity management tools, and metrics. In 2024, we published a liquidity risk management guide to aid effective decision making for MIS managers and Supervisors. We expect MIS managers to have considered the 2024 guidance, reviewed their LRM practices, and made improvements where appropriate….
Key takeaways for boards, CEOs and senior executives
Have you identified any gaps in your liquidity risk management practices and have you addressed them?
(FCR, p. 22)
In the 2024 Liquidity risk management guide (Guide) referred to in the FCR, LRM is defined as follows:
Fund liquidity is about how fund assets can be sold without negatively impacting the price of those assets or needing to secure funding (if applicable). Good management of fund liquidity is an important part of delivering fair outcomes for consumers and markets. It is critical to ensuring investors are treated equitably, and that funds perform and operate in line with the information given to investors. It also plays an important role in supporting orderly and stable markets, particularly during volatile conditions.
(Guide, p. 4)
The governance-level question for boards, CEOs and senior executives quoted above from the FCR is a thinly veiled reference to the Guide’s sub-feature 11.1, which states:
Both the Manager and Supervisor undertake regular evaluation and reviews of fund LRM practices to ensure these remain effective and fit for purpose. This includes looking at each of the features outlined in this guidance and completing a gap analysis of actual and expected performance.
(Guide, p. 19)
The message from the quoted passages is unequivocal. Within the timespan of the FMA’s current financial year – 1 July 2025 to 30 June 2026 – all MIS managers to whose managed funds the Guide applies and their Supervisors should complete the LRM gap analysis exercise as specified in the Guide’s sub-feature 11.1. The FMA will be checking in with Supervisors to see whether this has indeed happened and if more input from the regulator is required to improve upon the process. MIS managers and Supervisors should take note.
But where is this imperative to undertake sub-feature 11.1 LRM gap analysis ultimately emanating from? It turns out that the source is from overseas and comes in the form of the International Organization of Securities Commissions (IOSCO), of which the FMA is a member.
IOSCO calls the shots on LRM
In May 2025, IOSCO published two major, interlinked final reports on LRM:
These two final reports represent the culmination of work undertaken by IOSCO that began with the production of its first LRM reports in 2018. Together these final reports come to over 100 pages of text. They are related to parallel work on LRM performed by the Financial Standards Board (FSB) that resulted in its own final report Revised Policy Recommendations to Address Structural Vulnerabilities from Liquidity Mismatch in Open-Ended Funds (Revised Policy), which was published just before Christmas in 2023. Literally years in the making, with multiple prior reports and consultation papers behind them, when taken together these three final reports represent the Bible of LRM. Those seeking to interpret what FMA’s Guide means in practice may need to look no further than to this Bible.
In this article, we shall concern ourselves with IOSCO’s Revised Recommendations and leave the Interpretation Guidance to a second, follow up article.
Cracking the whip
In the Revised Recommendations, IOSCO makes an important announcement of an impending international LRM implementation review that may not have attracted sufficient attention in New Zealand’s managed funds industry at the time:
IOSCO expects that securities regulators will actively promote the implementation of the Revised Liquidity Recommendations [i.e., the Revised Recommendations] by responsible entities [i.e., MIS managers in the New Zealand context] within the context of the relevant collective investment scheme (CIS, more generally managed fund schemes) in their respective jurisdictions. Hence, the implementation of the recommendations (as revised) may vary from jurisdiction to jurisdiction, depending on local conditions and circumstances.
IOSCO will review progress by member jurisdictions in implementing the Revised Liquidity Recommendations and the Implementation Guidance. The review process will begin with a stocktake, to be completed by the end of 2026 [our emphasis], of the measures and practices adopted and planned by member jurisdictions. IOSCO will aim to coordinate this stocktake with the FSB’s stocktake of the measures and practices adopted and planned to implement the Revised FSB Recommendations, to provide a comprehensive picture. The findings from this stocktake will feed into an assessment of whether implemented reforms have sufficiently addressed risks to financial stability, including, if appropriate, whether to refine existing tools or develop additional tools for use by responsible entities across the relevant jurisdictions.
(Final Report, pp. 5-6)
Thus IOSCO has set a tight deadline, calculated to fit in with a corresponding deadline of the FSB’s, for conducting an international stocktake by the end of 2026 of how far its member securities regulators have got along within their jurisdictions in implementing the Revised Recommendations and the Implementation Guide. New Zealand is one of those jurisdictions and the FMA is its IOSCO member securities regulator. It can be imagined that no securities regulator would want to stand out for dragging the chain in meeting IOSCO’s strict deadline. Hence it should be no mystery why, in the FCR, the FMA has given MIS managers and their Supervisors a timeframe of its own making, being the duration of its current financial year, to have completed the gap analysis specified in the Guide’s sub-feature 11.1 and done something constructive about their LRM practices based on the findings.
Regulators put on notice
The Revised Recommendations are replete with advice as to what securities market regulators are expected to be doing for the cause of LRM within their own jurisdictions. It is clear from this advice that regulators are assumed to be actively engaged with fund managers with respect to ensuring that LRM is put in place for managed funds. For example:
Securities regulators have a key role throughout the entire life cycle of a CIS by putting in place appropriate regulatory requirements for responsible entities and conducting appropriate oversight of responsible entities’ liquidity risk management processes, in both normal and stressed market conditions, encouraging dialogue with entities about it.
In particular, securities regulators that authorise or license CIS and/or their responsible entities should focus on the recommendations relevant to the pre-launch/design phase of the life of a CIS to the extent consistent with local law, as part of the authorisation process. For example, they should, consistent with their overall approach to the authorisation of the CIS, consider the proposed inter-relationship between the asset liquidity, the dealing, notice and settlement arrangements, the available LMTs and disclosure arrangements included in the design of an OEF [i.e., an open-ended fund]. Where appropriate, they should establish the processes and specific criteria for allocating OEFs to the respective liquidity categories in line with the indicative guidelines in this report as well as relevant specificities of the domestic liquidity framework in their jurisdiction.
(Revised Recommendations, p. 9)
It is evident from the quoted passage that securities regulators are expected by IOSCO to become quite interventionist in the way that they demand and enforce appropriate and effective LRM standards and practices from fund managers. However, the Revised Recommendations are careful to state that “it is the duty of responsible entities to ensure that securities regulators are kept appropriately informed of their actions and, unless otherwise provided by applicable law and regulation, they should not rely on approval from securities regulators before making their decisions (ibid. p. 10). The Revised Recommendations express caution about the “risk of moral hazard” and “potential spill-over effects and other possible unintended consequences” that could arise where regulators might exercise “any direct intervention power which involves requiring OEFs to suspend redemptions” [ibid.).
The quoted passage alludes to the three liquidity categories that have been created by the FSB for classification of managed funds and the assignment of appropriate LRM practices and investor withdrawal rules. New Zealand investors should be hearing more about these categories as they enter into the lexicon of the national securities marketplace. In the Revised Policy, it is noted that the FSB has established a tiered liquidity risk system for categorising managed funds for securities regulators to apply as follows:
In-line with their domestic liquidity frameworks, authorities should determine when a fund may be considered to invest “mainly” in liquid assets (Category 1); “mainly” in less liquid assets (Category 2); or may be considered to “allocate a significant proportion” of its assets under management to illiquid assets (Category 3).
(Revised Policy, p. 16)
This three-tiered categorisation system also allows for managed funds that might not fall clearly into only one of the three main categories. Armed with this simple but flexible system, regulators can set and apply LRM requirements for fund managers to meet in relation to terms and conditions for investor withdrawals and the specific kinds of liquidity risk management tools (LMTs) that would normally be needed for each fund liquidity category. MIS managers in New Zealand should be studying the FSB’s system to determine how it applies to their own managed funds, if they have not done so already. They should expect that the FMA and their Supervisors will be looking at their managed funds through the three-tier liquidity risk categorisation promulgated by the FSB and advocated by IOSCO.
Changes to the rules
The Revised Recommendations set out the latest changes to LRM rules. IOSCO makes 17 recommendations for LRM, but in light of the FSB’s Revised Policy, the Revised Recommendations announce changes to four of them, namely recommendations 3, 6, 7 and 17. MIS managers should study the updated 17 Recommendations for their application to their own LRM policies and practices.
To summarise the changes to the four recommendations, we list them as follows.
Recommendation 3
The responsible entity should ensure that the OEF’s investment strategy and the liquidity of its assets should be consistent with the terms and conditions governing fund unit subscriptions and redemptions both at the time of designing an OEF and on an ongoing basis. The redemption terms that the OEF offers to investors should be based on the liquidity of its asset holdings in normal and stressed market conditions. To this end, when structuring an OEF that allocates a significant proportion of its assets under management to illiquid assets, responsible entities should consider a low redemption frequency and/or implementing long notice or settlement periods.
(Revised Recommendations, p. 18)
The revised Recommendation 3 comes with a long list of requirements for fund managers to meet, starting right from product design. It explicitly requires application of the FSB’s three-tier liquidity categorisation to managed funds. MIS managers need to reflect on Recommendation 3 and how it might apply to their own range of managed funds.
Recommendation 6
The responsible entity should consider and implement a broad set of liquidity management tools and measures to the extent allowed by local law and regulation for each OEF under its management, for both normal and stressed market conditions as part of robust liquidity management practices.
(ibid., p. 24)
Text provided with this recommendation introduces a critical distinction between “anti-dilution LMTs” and “quantity-based LMTs”. The former are defined as aiming “to pass on the estimated costs of liquidity associated with OEF subscriptions/redemptions to the subscribing/redeeming investors by adjusting the NAV of the OEF or the price at which they transact”, whereas the latter are defined as aiming “to limit the amount of liquidity available to redeeming investors” (ibid. p. 25). MIS managers should be reviewing their LMTs in light of Recommendation 6 to determine whether these tools are anti-dilution or quantity-based and considering whether more of either type should be required for their managed funds.
Recommendation 7
The responsible entity should consider and use anti-dilution LMTs to mitigate material investor dilution and potential first-mover advantage arising from structural liquidity mismatch in OEFs it manages, to ensure that investors bear the costs of liquidity associated with fund subscriptions and redemptions, and to arrive at a more consistent approach to the use of anti-dilution LMTs. Such tools should impose on subscribing and redeeming investors the explicit and implicit costs of subscriptions and redemptions, including any significant market impact of asset sales to meet those redemptions.
(ibid., pp. 27-8)
This recommendation indicates that having anti-dilution LMTs should be considered as mandatory for managed funds. MIS managers should be reviewing their anti-dilutionary LMTs for their fairness and effectiveness or introducing them if not already in existence. Disclosure of such LMTs and their potential impact on investors will be important to get right.
Recommendation 17
The responsible entity should publish clear disclosures of the objectives and operation (including design and use) of anti-dilution LMTs, quantity-based LMTs and other liquidity management measures to improve awareness among investors and enable them to better incorporate their potential use and the cost of liquidity into their investment decisions and mitigate potential adverse trigger effects.
(ibid., p. 45)
Recommendation 17 makes very clear that there is a heavy burden of disclosure on fund managers concerning their LRM tools and practices. Part 2 Fair dealing of the Financial Markets Conduct Act comes squarely into the purview of this recommendation, as does Part 8 section 462. MIS managers will need to scrutinise closely how they undertake this kind of disclosure in their PDS, OMI, SIPO, and website documentation, as falling short carries significant risks.
Conclusion
“IOSCO’s Revised Recommendations should be considered as required reading by MIS managers,” said Matthew Band, General Manager of Trustees Corporate Supervision at Trustees Executors.
“The FMA, as a member of IOSCO, will certainly have paid close attention to this important paper on LRM.”
“The regulator has gone public in the first FCR as giving high priority to LRM and having strong expectations that MIS managers and their Supervisors will have together engaged in depth over LRM practices during its current financial year.”
“Those MIS managers who have not already undertaken the LRM review exercise as specified in clause 11.1 of the Guide need to get a hurry along and their Supervisors should be ensuring that this happens.”
“Fortunately, given the detail that is contained in the Revised Recommendations, IOSCO’s latest work on LRM principles can be regarded as the global best-practice benchmark.”
“Trustees Executors has already proactively engaged under clause 11.1 with all of its MIS manager clients to whom the Guide applies and this is proving to be a worthwhile exercise.”
“We look forward to further engagements with our MIS manager clients concerning LRM over 2026 and beyond in accordance with the Guide’s clause 11.2, which requires regular LRM reviews.”
For comment or more information, or to be added to the free email subscriber list of “The Supervisor”, please contact Matthew Band at [email protected].